Rational Mutual Fund and ETF Selection
Rational selection of equity and bond mutual funds and ETFs – An Overview
Given the extremely large variety and number of available fixed income and equity investment mutual funds and ETFs, investors need a rational basis to select among them. Without scientific selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make erroneous decisions based on false assumptions.
Most individual investors want to select bond and equity mutual funds and exchange-traded funds (ETFs) to hold for a long duration.
Many would also like to invest additional amounts automatically into these funds over time and not to have to monitor them frequently. These investors are less concerned about short-term fluctuations than about their longer-term capital appreciation goals. In addition, of course, they hope to choose mutual funds and ETFs with exceptional performance and to avoid funds that consistently trail the pack.
Such investors want to use mutual screening or selection criteria to identify better funds and to minimize the need for frequent changes due to inferior performance. Individual investors are better served, if they understand what the scientific investment literature says about potential selection criteria.
These articles discuss valid fund screening and selection criteria:
- Avoid mutual funds and ETFs with sales commissions and 12b-1 fees
- Choose mutual funds and ETFs with lower investment management expenses
- Avoid mutual funds with higher investment portfolio turnover
- Avoid very large actively managed mutual funds
- Choose sufficiently mature mutual funds and ETFs
- Choose mutual funds with a minimum economical portfolio size
- Evaluate historical investment performance, but only after using other investment screening criteria
To implement these investment fund selection criteria, you need on-line fund screening applications supported with up-to-date data.
The Skilled Investor has also provided overviews of some investment fund screening applications and databases that are available on the web.
Many of these selection criteria are associated with investment costs, which are a dominant issue in efficient personal investment management. Click here for more articles on investment costs: Controlling Investment Costs
Personal Financial Planning
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])
- 15 Value-Added Individual Investor Activities (Before estimating the investment value that you might add or take away from your portfolio, you first need to determine whether your strategies are or are not likely to lead to optimal risk-adjusted investment returns.
This value estimation is separate from any hourly opportunity cost related to spending time on your investments versus an alternative use [...])
- Retirement Savings Needs of Renters Without Financial Planning Improvements (Retirement savings needs of renters prior to any financial planning improvements
Starting to plan with a non-optimal baseline projection
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their lifetime finances and retirement security. [...])
- DWS S&P 500 Index Fund (SXPAX) receives a +1 Fund Authority Score (The table below presents The Skilled Investor's Fund Authority Score and other information for the DWS S&P 500 Index Fund (SXPAX).
The Scudder Equity 500 Index Fund (BTIEX) and the DWS S&P 500 Index Fund (SXPAX)
The Skilled Investor has published an article about lower cost S&P 500 index mutual funds that you can read, which is [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPIX) achieve a +8 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- Avoid Mutual Fund and ETF Sales Commissions and Fees (Avoid mutual funds and ETFs with sales commissions and marketing fees
Summary: There is no convincing evidence that sales loads and other sales fees charged to investors result in higher mutual fund and ETF performance.
In fact, the opposite has repeatedly been proven true with mutual funds, which have a long performance history to evaluate. Paying a [...])
- Risk-Free Investment Money Is Fantasy Money (
For Individual Investors Risk-Free Investment Money Is Fantasy Money
Securities with low investment risk and high investment returns are just fantasies.
No "risk-free" investment money is consistently and reliably available to individuals. Luck dominates skill in the securities markets. Clever investment selection is vastly over-hyped, and only the promoters tend to benefit. On average over long periods, [...])
- How Many Mutual Funds are Needed for a Well-Diversified Portfolio? – Evidence (Actively-managed mutual funds are not created equally. Performance can vary significantly - even when funds pursue similar strategies or "styles."
This article addresses the impact on portfolio diversification of holding more than one actively-managed mutual fund. (For the companion article to this, see: How many mutual funds are needed for a well-diversified portfolio? – a commentary)
- The John Bogle Blog and His Financial Article About ETFs (John C. Bogle's Blog and his article about ETFs
This article is a heads-up to people interested in investment blogs and personal finance blogs.
John C. Bogle, the founder of The Vanguard Group, Inc., has a blog called The Bogle eBlog. (If you are wondering about "eBlog," it is an anagram of Bogle.) Mr. Bogle just posted [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Historical investment performance (
Fund Authority Scores rate stock mutual funds and ETFs on the most important economic factors affecting long term diversified equity investment fund performance. This article explains how historical fund performance is calculated.
<<-- Go to Part 1
Go to Part 3 -->>
Part 1 of this article discussed direct and hidden investment costs, the most heavily weighted factors [...])
- Investment Valuation and Securities Risk for Individual Investors (
The securities markets provide an evolving consensus of the risk-adjusted value of particular securities.
By understanding how the markets value securities, individual investors can chose more durable investment strategies
Judging the potential usefulness of different investment strategies requires some understanding of what the public securities markets really do. This article discusses how the markets price financial securities [...])
- Choose Lower Mutual Fund and ETF Management Fees (Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have [...])
- Own Investment Mutual Funds and ETFs – Not Individual Securities (Own Investment Mutual Funds and ETFs - Not Individual Securities
Owning individual stock and bond securities is just a big waste of your valuable time and money
Individual investors tend to be terrible investment portfolio managers. Almost everyone can hire an index fund manager to do a much better job for far less time, money, risk, and [...])
- Understand the Confusing Securities Market Motion Picture (
Securities markets are usually very quick to adjust prices to reflect new information. However, this price adjustment process may take longer and be more volatile, if the new information is ambiguous.
At any point in time, market participants will already have used more or less rigorous valuation methods to judge their expected risk-adjusted value of securities. [...])
- Part 4 of the Biggest Personal Finance Story of the Past 30 Years ( < <-- Go to Part 3
The Biggest Personal Finance Story of the Past 30 Years - Part 4
What does it mean to individual investors that the financial services industry is now about 21% of S&P 500 market capitalization?
(For a graph of the relative percentage shares of various sectors within the S&P500 index over [...])
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